Structural and cyclical determinants of access to finance: Evidence from Egypt Frank Betz 1 Farshad Ravasan 2 and Christoph Weiss 1 1 European Investment Bank 2 Oxford University 20 January 2020 The research summarized in this presentation was supported by the EIB Institute through its STAREBEI programme. Access to finance 20 January 2020 1 / 28
Why do we care? Figure: Financially excluded firms remain Figure: Egypt has many financially small excluded firms Access to finance 20 January 2020 2 / 28
Private sector credit in Egypt: from bad to worse Figure: The government crowding out Figure: Public debt was partly monetized the private sector Access to finance 20 January 2020 3 / 28
Why do firms participate in the financial system? Egypt is know as a cash economy (94% of transactions in cash, according to Mastercard) and for its large informal sector Registered but unbanked forms operate on a semi-formal basis. This way of operating may help firms to save on taxes but aggravates information asymmetries Operating on a informal (or semi-formal) basis can be optimal if intermediation capacity of the banking system is low (Straub, 2005) institutional quality is poor (Johnson et al., 2002) opportunity costs in the form of lost growth are low, for instance because entrepreneurs are less skilled (Gennaioli et al., 2013) Access to finance 20 January 2020 4 / 28
Results Structural level Firms run by more experienced and more educated CEOs are more likely to become financially included over the sample period We do not find a role for intermediation capacity and institutional quality Entrepreneurial human capital appears to matter because of opportunity costs rather than financial literacy Cyclical level CEO education and experience is positively associated with access to credit Crowding out reflected in greater prevalence of credit constraints Access to finance 20 January 2020 5 / 28
This presentation Motivation 1 Empirical strategy 2 Data 3 Results 4 Conclusion 5 Background slides 6 Access to finance 20 January 2020 6 / 28
Financial inclusion To examine financial inclusion we estimate the following regression: ∆ account i = β 1 ∗ crowdingout i + β 2 ∗ ∆ CEOeducation i + β 3 ∗ ∆ CEOexperience i + γ ∗ X i + U i Where account i equals 1 if the firm has a checking or savings account The ∆-prefix indicates the difference between the value in 2016 and 2013 (the two waves of the survey for Egypt) crowdingout i measures local supply of credit CEOeducation i is likely to change with CEO, thus all specifications also control for CEO experience. Access to finance 20 January 2020 7 / 28
Credit constraints To examine credit constraints we estimate the following regression: ∆ constrained i = β 1 ∗ crowdingout i + β 2 ∗ ∆ CEOeducation i + β 3 ∗ ∆ CEOexperience i + γ ∗ X i + U i Only firms that have demand for credit can be credit constrained. In a second step we use liquidity shocks to instrument credit demand. Candidate instruments: Loss due to spoilage Loss due to informal gift request Loss due to power outage Last step: Generalize to SN using 2013 cross-section of MENA ES Access to finance 20 January 2020 8 / 28
Outline Motivation 1 Empirical strategy 2 Data 3 Results 4 Conclusion 5 Background slides 6 Access to finance 20 January 2020 9 / 28
Firm-level data Firm-level data come from the MENA Enterprise Survey The MENA ES is a representative firm-level survey financed jointly by EIB, EBRD, and the World Bank and conducted in 2013 The finance module of the survey asks firms whether they have a checking or savings account are credit constrained (rejected or discouraged) The survey also includes information on firm characteristics educational attainment and experience of the manager business environment and institutional quality In 2016, a follow-up survey was done in Egypt longitudinal data (panel firms) Access to finance 20 January 2020 10 / 28
Complementary data sources The crowding-out index draws on information on the location of bank branches on bank security holdings and loans from Orbis BankFocus and is computed as follows 2015 2012 s j , t − l j , t s j , t − l j , t � � crowdingout j = − � j a j , t � j a j , t t =2013 t =2010 where s j , t and l j , t denote security holdings and loans of bank j and � j a j , t refers to total assets in the banking system. Access to finance 20 January 2020 11 / 28
Bank balance sheets Focus on the following banks: Public National Bank of Egypt Banque Misr Banque du Caire Private CIB Foreign QNB Figure: Government debt mainly held by public banks HSBC Access to finance 20 January 2020 12 / 28
Outline Motivation 1 Empirical strategy 2 Data 3 Results 4 Conclusion 5 Background slides 6 Access to finance 20 January 2020 13 / 28
Financial inclusion: baseline results (1) (2) (3) (4) ∆ Account ∆ Account ∆ Account ∆ Account ∆ CEO university education 0.127** 0.142** (0.06) (0.06) ∆ CEO experience 0.037* 0.047** (0.02) (0.02) ∆ CEO female -0.034 -0.024 (0.08) (0.09) Initially informal -0.153** -0.170** -0.157** -0.168** (0.07) (0.07) (0.07) (0.08) Young firm 0.182*** 0.164*** 0.167*** 0.175*** (0.06) (0.06) (0.06) (0.06) Small firm 0.124*** 0.136*** 0.129*** 0.130*** (0.05) (0.05) (0.05) (0.05) N 612 598 614 597 R2 0.06 0.06 0.05 0.07 Access to finance 20 January 2020 14 / 28
Financial inclusion and financial system characteristics (1) (2) (3) (4) ∆ Account ∆ Account ∆ Account ∆ Account Local financial inclusion -0.087 (0.13) Local financial intermediation -0.064 (0.15) Crowding out index -0.030 (0.03) Liquidity shock 0.052 (0.05) ∆ CEO university education 0.124** 0.129** 0.104* 0.143** (0.06) (0.06) (0.06) (0.06) ∆ CEO experience 0.050** 0.052** 0.042* 0.045** (0.02) (0.02) (0.02) (0.02) ∆ CEO female -0.037 -0.033 -0.035 -0.024 (0.09) (0.09) (0.09) (0.09) Initially informal -0.121 -0.108 -0.103 -0.168** (0.07) (0.10) (0.09) (0.09) N 545 545 516 597 R2 0.08 0.10 0.09 0.08 Access to finance 20 January 2020 15 / 28
Financial inclusion and institutional quality (1) (2) (3) (4) ∆ Account ∆ Account ∆ Account ∆ Account ∆ political instability 0.064 (0.04) ∆ property rights enforced 0.005 (0.03) ∆ courts impartial -0.030 (0.03) ∆ courts quick -0.055 (0.04) ∆ CEO university education 0.135** 0.142** 0.140** 0.142** (0.06) (0.06) (0.06) (0.06) ∆ CEO experience 0.045** 0.047** 0.048** 0.047** (0.02) (0.02) (0.02) (0.02) ∆ CEO female -0.019 -0.024 -0.022 -0.015 (0.08) (0.09) (0.09) (0.09) Initially informal -0.174** -0.168** -0.174** -0.168** (0.07) (0.08) (0.08) (0.08) Sample size 590 597 597 597 R2 0.08 0.07 0.08 0.08 Access to finance 20 January 2020 16 / 28
Credit constraints (1) (2) (3) (4) ∆ constrained ∆ discouraged ∆ rejected ∆ constrained Crowding out index 0.065** 0.062** 0.004 0.052* (0.03) (0.03) (0.01) (0.03) ∆ CEO university education -0.115* -0.154** 0.038** -0.097 (0.06) (0.06) (0.02) (0.06) ∆ CEO experience -0.014 -0.035 0.021** -0.011 (0.02) (0.02) (0.01) (0.02) ∆ CEO female -0.095 -0.102 0.007 -0.098 (0.09) (0.09) (0.01) (0.09) ∆ ownership 0.187** 0.190*** -0.002 0.203*** (0.07) (0.07) (0.01) (0.08) ∆ exporter 0.169*** 0.147** 0.022 0.196*** (0.06) (0.06) (0.02) (0.06) ∆ audit -0.068 -0.059 -0.009 -0.051 (0.04) (0.04) (0.01) (0.05) Initially informal 0.223** 0.186* 0.037 0.214* (0.11) (0.11) (0.03) (0.11) ∆ account -0.104** (0.05) N 521 521 521 516 R2 0.10 0.10 0.06 0.11 Access to finance 20 January 2020 17 / 28
Instrumenting credit demand (1) (2) (3) (4) ∆ need ∆ constrained ∆ discouraged ∆ rejected Liquidity shock 0.213*** (0.06) Crowding out index 0.022 0.043*** 0.040** 0.003 (0.03) (0.02) (0.02) (0.01) ∆ CEO university education -0.083 -0.052** -0.092*** 0.040** (0.06) (0.03) (0.03) (0.02) ∆ CEO experience -0.002 -0.018 -0.038*** 0.020** (0.02) (0.01) (0.01) (0.01) ∆ CEO female -0.154 0.023 0.013 0.010 (0.09) (0.07) (0.07) (0.02) ∆ ownership 0.222** -0.003 0.003 -0.006 (0.09) (0.06) (0.06) (0.02) ∆ exporter 0.232*** -0.006 -0.025 0.018 (0.07) (0.05) (0.05) (0.02) ∆ audit -0.067 -0.023 -0.015 -0.008 (0.05) (0.02) (0.03) (0.01) Initially informal 0.225** 0.056 0.023 0.034 (0.10) (0.07) (0.07) (0.03) ∆ need 0.742*** 0.726*** 0.016 (0.15) (0.16) (0.08) N 521 521 521 521 R2 0.74 0.71 0.07 Access to finance 20 January 2020 18 / 28
Financial literacy and firm quality (1) (2) (3) (4) ∆ Procedures ∆ Website ∆ Innovator ∆ Expansion ∆ CEO university education 0.004 0.086** 0.076* 0.153** (0.04) (0.04) (0.04) (0.07) ∆ CEO experience -0.012 0.007 0.014 0.025 (0.02) (0.02) (0.02) (0.03) ∆ CEO female 0.004 0.098 0.142 -0.067 (0.06) (0.07) (0.09) (0.17) Initially informal 0.160*** -0.055 0.021 0.066 (0.06) (0.07) (0.07) (0.12) Young firm -0.013 0.176*** 0.026 0.116 (0.04) (0.06) (0.06) (0.08) Small firm 0.045 0.029 0.057 -0.095 (0.03) (0.05) (0.04) (0.07) N 603 601 603 291 R2 0.04 0.05 0.05 0.10 Access to finance 20 January 2020 19 / 28
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